Fed takes up third rate cut in December amid rising member dissent

17 Dec 2025 , 12:08 PM

FED DOVISH, BUT LACKING CONVICTION 

As expected, the Fed cut rates by another 25 bps to the level of 3.50% to 3.75%. Since September 2024, the Fed rates are down a full 175 bps. The chart below captures the move. 

Chart Source: US Federal Reserve 

As can be seen from the above chart, the Fed rates had peaked at 5.50% around early 2023 and stayed at that level till August 2024. Between September 2024 and December 2024, Fed cut rates by 100 basis points. Through most of 2025, the Fed was quiet, but again, between September 2025 and December 2025, it cut rates by 75 bps. What stands out is that the latest 25 bps rate cut in December lacks conviction. The dissent was higher with 3 negative votes against 9 neutral to positive votes. Even as Trump has been urging Powell to cut rates aggressively, the Federal Open Markets Committee (FOMC) is far from convinced. 

WHAT WE READ FROM DECEMBER 2025 FOMC STATEMENT 

Jerome Powell had given the first signals of a rate cut in his Jackson Hole speech in August, which was followed by a rate cut in September and again in late October. The December rate cut marks the third rate cut of 2025. Here is what we read from the FOMC statement. 

• The vote in favour of a 25-bps rate cut was less than emphatic at 9:3. If one looks at the dot-plot chart, the probabilities of further rate cut are down to 1 rate cut in 2026 and just one more rate cut in 2027; so, we could end 2027 in the range of 3.00%-3.25%.

• The Fed statement laid a lot of focus on careful analysis of data in the upcoming meetings. It shows that the Fed may be back to its focus on inflation in the coming months, with the last PCE inflation for September edging 10 bps higher to 2.8%.

• The dissent becomes more evident if you look at granular data. Four non-voting members expressed soft dissent to the rate cut proposal. Seven officials insisted that there should be no further rate cuts in 2026. Clearly, dissent was all over.

• Going ahead, caution on rate cuts is inevitable. Q3 GDP growth projection has been upped by 50 bps to 2.3%, while the FOMC expects inflation to stay well above 2%, right up to year 2028. That is hardly conductive for further rate cuts.

• Fed has also made an important liquidity announcement. It will start buying Treasury Securities to the tune of $40 billion a month from this month, which will infuse substantial liquidity, but also bloat the Fed balance sheet once again. 

One subtle point here is the delayed data flows. We still have employment and PCE inflation data only till September and decisions in December are based on that. That is surely risky! 

CHARTING THE ROAD AHEAD FOR FED RATES? 

Here are the CME Fedwatch probabilities of rate moves at each upcoming Fed meet.  

Fed Meet	175-200	200-225	225-250	250-275	275-300	300-325	325-350	350-375
Jan-26	Nil	Nil	Nil	Nil	Nil	Nil	22.1%	77.9%
Jun-26	Nil	Nil	Nil	0.9%	9.2%	30.9%	41.3%	17.6%
Dec-26	Nil	0.5%	3.0%	11.1%	24.5%	32.1%	22.4%	6.3%
Jun-27	0.1%	0.6%	3.4%	11.5%	24.3%	31.1%	21.9%	6.8%
Dec-27	0.2%	1.0%	4.4%	12.4%	23.1%	27.9%	20.7%	8.5%

Data source: CME Fedwatch 

The CME Fedwatch probability chart focuses on 2026 and 2027 calendar years. 

• For now, the probability of a rate cut in Jan-26 is quite low. However, there is 82.4% probability of a 25-bps rate cut by Jun-26. That is likely to be flat till Dec-26.

• As of June 2027, not much action is expected if there is a second rate cut in 2026. Alternatively, the second rate-cut could happen first half of 2027. 

What we gather from the CME Fedwatch data is that only 2 more rate cuts can be expected between 2026 and 2027. However, whether it is front ended in 2026 or pushed back to 2027 may be more of a policy choice. 

WHAT DOES THIS FED RATE CUT MEAN FOR INDIA? 

The 25-bps rate cut would be positive for India in 4 ways. Firstly, India has seen a spike in bond yields in last 2 weeks, which has impacted borrowing programs. That may lessen now. Secondly, the rate cut by the Fed is likely to tone down the dollar index (DXY), putting less pressure on the rupee. Of course, other factors will also play a part. 

Thirdly, with the outlook for further rate cuts by the Fed being limited, the pressure on RBI to be dovish also reduces. That gives RBI more policy leeway. Last, but not the least, lower Fed rates are likely to be positive for gold prices as it reduces the opportunity cost of holding gold. That will surely have a positive wealth effect on Indian economy.